INVESTING: Initial public offerings have sizzle, but they also sting

Everyone loves easy money. Initial public offerings are often viewed as fast cash for those who get in early.

The craziest IPO I can remember was theglobe.comin the late 1990s. The stock went up over 10 times the first day of trading. Even though it’s been a while since those kinds of pops grabbed headlines, Wall Street continues to crank out a steady stream of IPOs. Some are worth looking at and some are better to walk away from.

Merrill Lynch is the lead underwriter for an IPO for Hertz rental car expected to debut this month. Merrill and two other private equity investors bought Hertz last December for $15 billion. The fact they are trying to take a nearly 90-year-old company public so soon after buying it should raise suspicions. The added billions in debt needed to finance the purchase should be an instant red flag.

The old advice about following the money led me to uncover some details of this deal that will definitely keep me from buying the stock. Leveraged buyout groups typically borrow a lot of money to help them purchase companies, and Hertz was no different. The acquirers borrowed so much that interest expenses doubled this year. For a company that saw a 77-percent drop in profit and only a 7-percent increase in revenue, that new debt burden might be insurmountable.

The three members of the buyout group received a total of $1.4 billion in a dividend payment this year. In addition, they are splitting a $75 million consulting contract. That contract will be canceled after the IPO, and they will each receive $5 million for their pain and suffering on losing the business.

Because Merrill is the lead underwriter, it will receive more than 10 percent of the amount raised in fees. That comes to $180 million. So, the buyout group has done its best to recoup as much of its investment as possible. I don’t blame the investors. But now, they are asking the public to buy the stock. As my buddies back in Jersey used to say, “Fuggetaboutit!”

As I mentioned, the investors paid $15 billion for Hertz last year. I looked at the offering, and it appears they’re way under water, which is probably why they’re looking for sucker investors to bail them out.

In the offering, Hertz is being valued at $6.5 billion. Add in the money the buyers took out in dividends and other payments, and they’re down almost $7 billion. That gets fixed if the stock does well over the next few years. But with all that added debt, I don’t think this lead balloon is going to fly.

If you want to know how bad an IPO can get, take a look at Vonage, which provides telephone service over the Internet. The company went public in May and initial trading was around $17 a share. You can buy all you want today for $6.50. That’s bad merchandise. Is Hertz the next Google? Not exactly.

As for the big picture, the overall market continues to churn higher. There is a constant risk of a small pullback any time, but for the rest of the year corrections should be mild and short-lived. I think a year-end rally and a small January pop are still coming. And it looks as if, overall, the large caps still offer the best risk-adjusted returns.

Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 829-5029 or at

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